In Chip-Counterfeiting War, a Small Win for IC Industry

Call it a small victory in a much larger battle over how to fight the semiconductor-counterfeiting war.

The Semiconductor Industry Association received notification this week that the Defense Logistics Agency (DLA) threw it a bone (my phrase, not SIA's) in the battle over DNA marking of semiconductors.

DLA announced that it will allow third-party marking on components in addition to work done by Applied DNA Sciences, which had been the mandated solution to the problem. (See: Anti-Counterfeiting DNA Marking Gets a Boost.)

"Our companies would sell the product and a third party would apply the DNA mark prior to shipping to DLA," David Isaacs, SIA's vice president of government policy, said in an interview Friday. "That partially addresses our concerns."

To recap: SIA has long opposed this approach to anti-counterfeiting policy as onerous for components vendors. The industry organization believes the core of the problem is a more open procurement plan adopted by DLA. That could be rectified by tightening procurement so that components are bought from authorized distributors.

In addition, the marking program has a number of unknowns, including whether the marking step itself affects component quality, and, in some cases, may actually void the product warranty.

Keep it simple
But mostly, SIA officials have been seeking a simple resolution to the problem. Said Isaacs: "We've been urging DLA to lock the front door, to require purchasing from authorized distributors."

Currently, DLA has a web-based purchasing process, intended presumably at increased government transparency, which "is open to anyone purchasing components... and injects a lot of uncertainty in the process," Isaacs said.

While this rule represents a tiny fraction of even mil-targeted components (FSC 5962, which SIA estimates generates less than $20 million in annual revenue), the concern is the precedent. Start requiring marking of these devices, and what's to stop DLA from throwing a wider net on more military components?

In addition to urging a front-door solution, the SIA also wants better locks on the back door, at the border.

Before 2008, incoming electronics shipments could be held for 30 days to check for counterfeiting. US Customs and Border Protection (CBP) would send companies photographs of suspect components to verify their legitimacy.

But in June of 2008, for reasons that still puzzle many, the CBP altered that process and started to redact virtually all of the useful information in its photographs. Customs agents take photos of chips, black out the markings on the package, and send the touched-up images to chip manufacturers, SIA said. That renders them useless, Isaacs said.

Redaction problems
CBP said it had to do this because its redaction policy limited the information that can be shared with trademark owners. That's because information protected by the Trade Secrets Act cannot be provided to a third party until after seizure, even if that information is intended for the company that holds the trade secret.

Kafka would have had a field day.

But the beat goes on in the larger war on counterfeiting and the natural and evolving tension between government and industry on how best to gird for the battles ahead.

"The battle's not lost because it's part of a bigger issue," Isaacs said. "We're in this for the long haul. We think the technical and other arguments we've brought forward will ultimately prevail."

@DodgeJ - yes we have, but it has been awhile and not a valid quote any more. Our determination was that it didn't do anything for us or help the quality of our fully Authorized Product in any way. We couldn't answer why would do this. In fact, it created many unresolved logistics issues. The reimbursement deal by DLA pays for most of the cost to Applied DNA, but not the costs incurred by actually doing it. The reimbursement money is a nice gesture, but it misses all the toughest issues. A 3rd party marking the parts could work, but there are unresolved logistics issues surrounding that. For example right now, there are specs that say any part marking means there needs to be post-mark testing done. For those parts, the DNA marking cannot be the last thing done to the parts. This means more handling and more testing post-marking unless DLA changes the way they order parts or pays a huge price differential. This is an example detail (and there are many more) that are unresolved by simply paying for DNA reimbursement.

If you look at who has actually signed up and map that against who is an OCM and who is a fully Authorized source of product, you will see nobody of any signficant size has signed up. I don't think there has ever been a discussion of "defending the technology" so I have never seen that as an issue. "Multiple contracts" means nothing if the right suppliers aren't signed up. For what DLA buys, the right suppliers are not signed up.

Let's make the DLA 5962 market real clear because there's a perception that it is a lot of money. It's not. It's $12M/year. That's it. It is almost 100% serviced through Distribution because it is so small. Now when you disect that $12M even further, you get into "currently in production" versus "out of production". The annual value of that business starts to look mightly small for a mandate and a technology choice to happen before significant purchasing changes. That's what really happened - the mandate happened before purchasing changes that would ensure the least counterfeit. It also looks really small for active product for OCM's who are selling to DLA through Distribution.

Now, start to look at who DLA is currently purchasing 5962 product from post-mandate. Anyone can look on their web site. It is a far higher percentage of non-Authorized suppliers because they saw an opportunity to win business by marking with DNA. Good for them, but what does this mean about odds of counterfeit? At Rochester, we have also looked at price being paid for the same product DLA was previously buying (for 10 years) 6 months ago. They are paying significantly more for higher odds of counterfeit, but it's got DNA on it!

The concerns of SIA on Applied DNA Sciences marking technology have not been fully addressed, as this article correctly states. You can see in the comments below by one of our member companies, Rochester Electronics, that our concerns have not been addressed. Rochester is not alone in their concerns - many of our companies have strong reservations about the use of this mandated, sole-source technology. The mandate by DLA to mark 5962 product will increase cost dramatically, and do little, if anything to address supply chain concerns. In fact, use of this technology, creates as many new problems/questions as it does answers/solutions. How much extra should taxpayers pay to mark chips with plant DNA when DoD and DLA can purchase authentic product from authorized distributors today (as quoted above)? When Applied DNA or 3rd party markers handle, unpackage, or mark chips from our companies, are they then liable and guarantee the warranty of that product that they have subsequently voided? What does marking a chip at one point in a very complex and lengthy supply chain do to verify that you have an authentic, reliable, and trustworthy semiconductor? While Applied DNA may have some answers to these questions (and many others), we've yet to see any that "fully" address our concerns. SIA and its member companies are committed to supplying authentic, reliable, and trustworthy product to DoD, DLA, and all outlets critical to our national infrastructure. We'll continue to work with DLA and others to develop ways to answer concerns and meet well-informed criteria and requirements for providing parts, but we believe that this is an ill-advised mandate that solves nothing.

@ddeisz...so much to respond to! I think you are right that the DLA would so quickly sole source. We all know how dangerous that is. It also eliminates a lot of other players and directly impacts their bottom line. The SIA has to take a hard position on this as they represent a lot of stakeholders that could lose a chunk of change from this DLA mandate. I'm not sure what PP you are referring to for resource material. My initial article was based on an interview session where ADNAS folks came together in a conference room to respond to my questions. APDN has announced publicly that it has signed multiple contracts--does the SIA think that the companies signing contracts don't "defend" the technology? ADNAS has been invited to speak at countless industry conferences which are Not pay for play. In 2012, two of ADNAS white papers were published by IMAPS, also by invitation--one was featured in Advanced Microelectronics on the front page. ADNAS have been invited to lead a workshop at the ERAI conference this coming April. It is safe to say that ADNAS is having the impact of a disruptive technology because it sounds like some industry players are pretty disrupted. Small beginnings are how every start-up, starts-up. Some one takes the risk to endorse their unknown product or process and eventually, if the company and the product are worth their salt, then everyone begins to hear of them. It is of some irony that the strongest in the gene pool tend to outlast their sibling species. Time will tell if ADNAS is made of the right stuff. That will be the final argument for the efficacy of this tech.

@Douglas - If the only people you are talking to are APDN, you are going to get the mistaken impression that SIA members are "completely satisfied". That is total BS. If you talk to the sources (the OCM's and Authorized Distributors) directly, you would know this. This article and follow-up comments look like they are directly from APDN powerpoint. From my exposure, SIA members are not questioning DNA technology per se. They are not challenging whether plant DNA could be secure in unique identification. From my exposure, SIA members are questioning the big picture and overall effectiveness of the total anti-counterfeit strategy in place and the logisitcs of today's APDN solution. Logistics include costs, but they also include a mandate that ignored the fact that almost all DLA 5962 procurement is through Distribution. Logistics also include the lack of full on-sight validation of DNA with a hand-held device. Logisitcs is also that the mandate is ink while most SIA members have gone laser.

It is naive to think that part marking tells you anything about part handling. It tells you who marked the part at one time and that is currently all it will tell you. Personally, I am shocked that our DLA went with a sole-source company that has always lost money ahead of implementing more solid procurment strategies.

Why don't we mark parts that come from Independent means? These are the highest risk parts for counterfeit. In my opinion, almost all SIA members are not satisfied with APDN, the mandate, and the lack of "buy Authorized First" within our own government. The only thing that SIA members have said "could work" is a third party marking solution but only if the logisitcs of warranty, ownership, and procurement specifications from DLA are resolved.

I was doing some reading of ADNAS' financials, and was stunned to see how poorly they are doing, especially on a YoY basis. A $9 million loss in three months on $300k in sales?

inancial Results For the three months ended December 31, 2012, APDN generated $317,670 in revenues from operations principally from the sales of authentication services. For the three months ended December 31, 2011, we generated $516,904 in revenues from operations. The decrease in sales for the three months ended December 31, 2012 compared to the three months ended December 31, 2011 was primarily caused by the expiration of certain contracts and delays in our transition to new contracts with products in our target markets.

Selling, general and administrative expenses increased from $2,152,428 for the three months ended December 31, 2011 to $2,521,167 for the three months ended December 31, 2012. The increase of $368,739, or 17.1%, is primarily attributable to higher professional and service fees incurred.

Research and development expenses increased from $78,473 for the three months ended December 31, 2011 to $147,666 for the three months ended December 31, 2012. The increase of $69,193 is attributable to additional research and development activity needed with current operations.

Total operating expenses increased to $2,689,828 for the three months ended December 31, 2012 from $2,329,274 for the three months ended December 31, 2011, or an increase of $360,554 primarily attributable to an increase in professional fees paid and in R&D expenditures, which was offset by a decrease in depreciation and amortization expense.

Net loss for the three months ended December 31, 2012 increased to $8,704,757 from a net loss of $2,409,905 for the three months ended December 31, 2011 primarily attributable to the factors described above, combined with the loss from change in fair value of warrant liability.

@Dodge...I think I wrote the first article for EBN on ADNAS as a result of an interview with them. I think your questions might be posed directly to them as they pobably have all the answers or at least have addressed them. If I were you, I would ask these questions of their Marketing people directly. They are the ones that are telling the ADNAS story with the greatest amount of knowledge. When in doubt, go to the source. I would very much like you to stay with this and post what you have learned by talking directly to them. It would help us all differentiate the facts from the hearsay. Maybe you could post in a Q and A format. Thanks. Here is the link to the first article I wrote: http://www.ebnonline.com/author.asp?section_id=1541&doc_id=246407

So I have heard, straight from ADNAS in a webinar, that this program will increase the cost of a chip by 5x - 8x. Doesn't matter who is paying for what, the end result is more expensive solutions paid by taxpayers.

I have also heard that the license fee is $75,000 per year, and the test to authenticate is $200 per test. Anyone have any different information?

He dind't contact ADNAS, but why did SIA say that they're concerns were only "partially addressed"? Of course ADNAS would say that the concerns were fully addressed. But isn't there still a bigger picture, about the affordability and appropriateness of the solution?

Another question - you seem to be a pretty staunch defender of ADNAS - are you involved with them in any way? I just have never seen anyone defend them (outside of their own bloggers).